Northwood Company manufactures basketballs. The company has a ball that sells fo

Question

Northwood Company manufactures basketballs. The company has a ball that sells for $30. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $18.00 per ball, of which 60% is direct labor cost. Last year, the company sold 51,000 of these balls, with the following results: Sales (51,000 balls) Variable expenses $1,530,000 918,000 Contribution margin Fixed expenses 612,000 492,000 Net operating income $ 120,000 Required: 1-a. Compute last year's CM ratio and the break-even point in balls. (Do not round intermediate calculations. Round up your final break even answers to the nearest whole number.) CM Ratio Unit sales to break even balls 1-b. Compute the the degree of operating leverage at last year's sales level. (Round your answer to 2 decimal places.) Degree of operating everage

Explanation / Answer

Req 1 CM Ratio 40.00% Unit Sales to break even 41000 Degree of operating leverate 5.10 CM ratio = contribution /sales 612,000/1530,000 40.00% BEP(units) = fixed cost/contribution margin per unit 492000/(30-18) 41000 Degree of operating leverage = contribution/net income 612,000/120000 5.10 Req 2 CM Ratio 32.00% Unit Sales to break even 51250 CM ratio = contribution /sales (12-2.4)/30 32.00% BEP(units) = fixed cost/contribution margin per unit 492000/9.6 51250 Req 3 Number of balls 63750 BEP(units) =( fixed cost+ target income)/contribution margin per unit (492000+120000)/9.6 63750 Req 4 selling price 34.00 CM ratio = 29.41% selling price per unit be x variable cost per unit is 27 so selling price should be = 40%              = (x-20.4)/x .40x                  = (x -20.4) x                         =20.4/.6 x                         = 34.00 Req 5 Selling price per unit 30 New variable cost (18*60%) 10.8 Contribution per unit 19.2 contribution margin ratio 64.00% unit sales to break-even 46125 balls (492000*180%)/23.2 Req 6A number of balls 52375 balls (885600+120000)/19.2 Req6B Contribution income statement Sales (51000*30) 1734000 Variable expenses (51000*10.8)) 550800 Contribution margin 979200 Fixed expenses 885,600 Net operating income 93,600 Degree of operating leverage 10.46 (contribution margin/net income)

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